Western Digital Corporation — Fiscal 2022 First-Quarter 10-Q Summary
Business context and reporting period
Western Digital develops and supplies data-storage devices and solutions, with reportable segments for hard disk drives (HDD) and flash-based products (Flash). The filing covers the 13 weeks ended October 1, 2021, compared with the 13 weeks ended October 2, 2020. Fiscal 2022 and fiscal 2021 each contain 52 weeks. The company adopted the two-segment reporting structure effective July 3, 2021.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $5.051 billion | $3.922 billion | Up 29% |
| Gross profit | $1.665 billion | $904 million | Up $761 million |
| Gross margin | 33.0% | 23.0% | Up 10.0 percentage points |
| Operating income | $778 million | $70 million | Up $708 million |
| Operating margin | 15.4% | 1.8% | Up 13.6 percentage points |
| Net income (loss) | $610 million | $(60) million | Improved $670 million |
| Diluted EPS | $1.93 | $(0.20) | Improved $2.13 |
| Cash flow from operations | $521 million | $363 million | Up $158 million |
| Capital expenditures | $245 million | $337 million | Down $92 million |
HDD revenue was $2.561 billion, up 39%, while Flash revenue was $2.490 billion, up 20%. HDD gross margin was 30.9%, compared with 26.2% previously; Flash gross margin was 37.0%, compared with 26.4%. Cloud revenue increased to $2.225 billion from $1.291 billion, while Client revenue was $1.853 billion and Consumer revenue was $973 million.
At October 1, 2021, cash and cash equivalents were $3.290 billion, total debt was $8.612 billion before issuance costs and discounts, and net debt was approximately $5.3 billion based on reported cash and debt. Total assets were $26.391 billion and shareholders’ equity was $11.361 billion. The company had $2.25 billion available under its revolving credit facility and was in compliance with applicable leverage and interest coverage covenants.
Material changes versus the prior comparable period
- Revenue growth reflected higher HDD and Flash exabytes sold, partly offset by lower average price per gigabyte due to product mix.
- HDD exabytes sold increased 52%, and Flash exabytes sold increased 30%.
- Gross margin benefited from higher volumes, cost reductions from production ramps, and $106 million less amortization of acquired intangible assets.
- Operating expenses increased 6% to $887 million, including higher research and development and selling, general and administrative costs. Employee termination, asset impairment and other charges declined to $18 million from $23 million.
- Cash from operations increased despite a $440 million use of cash from changes in operating assets and liabilities, principally reflecting working-capital timing.
- The company repaid $213 million of debt during the quarter, including a $150 million voluntary prepayment on Term Loan B-4. On October 22, 2021, after the reporting date, it prepaid the remaining $943 million principal balance of that loan.
- The company did not repurchase shares during the quarter. Approximately $4.5 billion remained available under the $5.0 billion repurchase authorization.
Guidance, outlook, commentary and risks
Management expects demand to remain supported by cloud deployments, work-from-home and distance-learning trends, gaming, 5G mobile devices, and increased storage content per phone. The company is progressing customer qualifications for its 20TB HDD and enterprise SSD products and expects these qualifications to support growth in fiscal 2022. The filing does not provide specific quarterly or annual revenue, earnings, or margin guidance.
Management expects fiscal 2022 company and Flash Ventures capital expenditures to total approximately $3.1 billion. After Flash Ventures lease financing and net operating cash flow, net cash used for property, plant and equipment purchases and Flash Ventures notes receivable activity is expected to be approximately $2.0 billion, subject to project timing, financing availability and terms.
- COVID-19 and semiconductor supply-chain disruptions affected manufacturing, customer shipments, logistics and factory costs. Incremental COVID-related logistics, absorption and factory costs were approximately $56 million in the quarter.
- Supply constraints, customer component shortages, COVID-related lockdowns and uneven geographic demand reduced or deferred some sales, particularly in Client and Consumer markets. Management expects these effects to be transitory, but no assurance is provided.
- Flash Ventures creates significant commitments and exposure. The company’s maximum reasonably estimable loss exposure was $4.421 billion, including $1.985 billion of operating lease guarantees.
- The company reported $20.378 billion of contractual cash obligations, including debt, interest, Flash Ventures commitments, leases, purchase obligations and mandatory deemed repatriation tax.
- Unrecognized tax benefits were approximately $762 million, with $132 million of accrued interest and penalties; approximately $758 million could result in potential cash payments. The IRS is pursuing substantial transfer-pricing adjustments and penalties, which the company disputes.
- Interest-rate sensitivity remains material: after hedging, approximately $3.21 billion of debt was exposed to variable rates; a one-percentage-point increase would increase annual interest expense by approximately $32 million.
- The top 10 customers represented 43% of revenue, although no individual customer represented 10% or more. Key risks include competition and pricing, technology transitions, supply-chain disruptions, debt, customer concentration, cyberattacks, foreign exchange, regulatory matters and litigation.
Important facts for investors to verify
- Whether HDD and Flash demand, pricing per gigabyte and gross-margin expansion persist after supply-chain conditions normalize.
- The timing and economics of the 20TB HDD and enterprise SSD qualifications and resulting customer deployments.
- Actual fiscal 2022 capital spending and Flash Ventures funding requirements versus the approximately $3.1 billion forecast.
- Post-quarter debt balances and interest expense after the October 22, 2021 repayment of Term Loan B-4.
- Potential cash exposure and timing related to IRS transfer-pricing disputes, unrecognized tax benefits and penalties.
- Whether COVID-19, semiconductor shortages, logistics costs or customer supply constraints remain transitory as management expects.
- The company’s ability to maintain liquidity while funding debt repayments, capital expenditures, Flash Ventures commitments and potential share repurchases.